Suppose that demand in a market can be represented by the following equation: P=8−Q and that supply can be represented by the equation: P=Q What is the equilibrium price and quantity in this market? Now suppose that a sales tax of $2 per unit is imposed on the product in this market. How would you now express the supply curve with this tax included? What are the new equilibrium price and quantity in this market? How much tax revenue is raised? Why is it less than the original equilibrium quantity multiplied by the $2 tax? What is the effect of this tax on the price consumers pay and on consumer surplus? What price do producers receive net of the tax (without the tax added)? How did this influence the quantity supplied? Calculate the deadweight loss associated with this tax.
The interaction between supply and demand in a market is a fundamental concept in economics. When supply and demand are in equilibrium, it represents an efficient allocation of resources, where the quantity demanded equals the quantity supplied, and a market-clearing price is established. However, the introduction of taxes can disrupt this equilibrium, affecting prices, quantities, and overall welfare in the market. In this essay, we will explore the impact of a $2 per unit sales tax on a hypothetical market, initially described by the equations P=8−Q for demand and P=Q for supply. We will determine the new equilibrium price and quantity, analyze the tax revenue generated, discuss the effect on consumer surplus and producer prices, and calculate the deadweight loss associated with the tax.